Malaysia’s Economic Issues: Will Weak Growth Stop?

Malaysia’s economic issues are overwhelming. The country wants to implement development projects such as Iskander Malaysia, the high speed rail track with Singapore, and the growth of its Islamic Finance industry.

The nation is attempting to solve its debt problems at the same time though. This balancing act will prove a difficult task for Prime Minister Najib Razak.

Prime Minister Najib said “We’re very closely monitoring how we manage our macro position as well as our fiscal and debt to make sure that we will not be downgraded” in an interview with Bloomberg.

The statement is because of Malaysia’s mounting concerns about its rising debt following a Fitch Ratings credit downgrade. Malaysia ran up its annual budget deficit every year since 1998.

In September 2013, Moody’s showed that Malaysia’s deficit as a percentage of GDP might exceed Najib’s target of 4.0%. The agency warned the Malaysian government that any new targets will become “increasingly out of reach” if their fiscal house is not in order.

Moody’s currently rates Malaysia government bonds at A3 with a stable outlook.

The Malaysian Ringgit, along with many currencies in Asia such as the Thai Baht and Indian Rupee, declined sharply in late 2013. This was due to the U.S. Federal Reserve’s change in monetary policy and decision to reduce quantitative easing (QE).

During this time, emerging economies such as Malaysia suffered some of the worst capital outflows in history. This meant significant declines across the board for many regional currencies, including the Ringgit, and a loss of confidence from investors.

Trying to Solve Malaysia’s Economic Issues

Malaysia’s problems, along with the current investment climate, makes people question whether Malaysia is able to continue its growth.

Prime Minister Najib and his United Malays National Organization (UMNO) party were reelected with a slim majority after elections in 2013. Investors and market watchers are now searching for signs that the Malaysian government is serious in tackling the country’s challenges.

Given Malaysia’s fiscal situation, the government decided to implement stricter fiscal regulations. They include raising fuel subsidies and postponing some public infrastructure projects. The Prime Minister also set his goal for the country’s overall GDP growth at between 4.0% to 5.0%.

Malaysia is attempting to put its fiscal issues in order. At the same time, they’re trying to convince both foreign and domestic investors that reforms will solve these problems.

But it’s easy to question whether these reforms are simply a public relations tactic used by the UMNO-led government to please dissatisfied voters from the May 2013 election.

Furthermore, a reduction in government spending might have negative effects at a time when the global economy is slowing.

Lower spending may result in the country cancelling or delaying some public infrastructure projects. These include the cross-border high speed rail system between Singapore and Malaysia which could enhance tourism, employment, and trade.

These are all benefits which would help Malaysia ensure it stays one of the region’s most important financial hubs. Time will tell whether the nation can stay competitive with its neighbors in Southeast Asia.

About Kate Wong

Kate previously worked in asset management for a major bank headquartered in Beijing and now manages her own venture capital fund. She also works as a freelance consultant to start-up companies in mainland China and Hong Kong.